| put 1. An option that conveys to its holder the right, but not the obligation, to sell a specific asset at a predetermined price until a certain date. In most cases, puts have 100 shares of stock as the underlying asset. For example, an investor may purchase a put option on GenCorp common stock that confers the right to sell 100 shares at $15 per share until September 21. Puts are sold for a fee by other investors who incur an obligation to purchase the asset if the option holder decides to sell. Investors purchase puts in order to take advantage of a decline in the price of the asset. Also called put option. Compare call. See also guarantee letter, synthetic put, transferable put right. 2. Sale of an issue of bonds before maturity by forcing the issuer to buy at par. Few bond issues permit the holder this option. A put option has an inverse relationship to the underlying security. As the value of the stock increases, the value of the put decreases. Like calls, puts can be used for both hedging and speculation. Puts can be purchased in conjunction with stock ownership as a form of insurance (that is, a hedge) against downside loss on a stock. If the stock price declines, the put holder can either sell the put and keep the stock, or exercise the put and sell the stock at the put's strike price. In either case, the increased value of the option will offset the stock loss to some degree. If the stock price rises beyond a certain level, the put will expire worthless. In this case, the put holder will lose the premium paid for the option but will still participate in the upward stock movement. The break-even point occurs when the stock price advances beyond the put's strike price plus the premium. Puts also can be used speculatively without a position in the underlying security. Instead of selling a stock short, an investor who anticipates a decline in the price of a stock can buy an at-the-money put. If the stock price rises, causing the put to expire worthless, the maximum loss is the premium paid for the put. But if the stock price declines substantially, the investor could make profits that far exceed the initial cost of the put. Henry Nothnagel, Senior Vice President Options, Wachovia Securities, Inc., Chicago, IL |
| put To force the seller of a put option to purchase shares of stock at the stipulated price. Puts are exercised by the owner only when the market price of the underlying stock is less than the strike price. Also called put to seller. |
What Does Put Mean?
An option contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified period. The buyer of a put option hopes that the underlying asset will drop below the exercise price before the expiration date. The possible payoff for a holder of a put option contract is illustrated by the accompanying diagram.
Investopedia explains Put
When an individual purchases a put, that person expects that the underlying asset will decline in price. The investor then will profit by selling the put option at a profit or by exercising the option, in other words, “putting the stock” to the option seller. If an individual writes a put contract, he or she expects the stock price to stay above the exercise price. Say an investor purchases one put contract for 100 shares of ABC Co. at $1 (total of $100 ($1 × 100)). The exercise price of the shares is $10, and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10. When ABC shares drop to $8, the investor's put option is in the money and can be closed by selling the option contract on the open market. Alternatively, the investor could go into the market and buy 100 shares of ABC at the market price of $8 and then exercise the put by selling (putting) the shares to the option writer for $10. Excluding commissions, the investor's total profit for this position would be $100 [100 × ($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a married put position and serves as a hedge against a decline in share price.
Related Terms:
• Call
• Derivative
• In the Money
• Option
• Short (or Short Position)
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